Why is the Biden administration considering retaliatory measures? What will be the impact of this decision on India?

The story so far: Over the past week, the United States announced and then immediately suspended a 25% tariff on $ 2 billion in imports from six countries, including India, as a retaliatory measure against the imposition by each of these countries of a digital services tax affecting the tech giants. from Silicon Valley, including Alphabet, Amazon, Apple, Facebook and Microsoft. The purported logic of suspending the tariff for up to 180 days after announcing it is to allow time for the ongoing international tax negotiations to continue and, in the words of U.S. Trade Representative (USTR) Katherine Tai, to seek “A multilateral solution … while maintaining the possibility of imposing tariffs under Article 301 if it is justified in the future”. Besides India, the countries affected by this tariff proposal are Austria, Italy, Spain, Turkey and the United Kingdom.

What is the basis for American action?

The gist of the argument advanced by the USTR office is that a “Section 301” investigation launched by the Trump administration in June 2020 found that the digital service taxes imposed by each of these countries were discriminatory. towards American technology companies. The Biden administration was likely aware that the deadline for authorizing tariff action based on these investigations would have expired this week, requiring approval of the 25% tariff.

Editorial | Digital tax fight: to avoid a tariff war

The immediate tariff suspension is probably in part a recognition that the six potentially affected countries are suffering from a weak post-COVID-19 recovery and the opening of a new trade war front could harm them not only, but also to the wider global economy. The combination of depressed economic activity from the effects of the pandemic and tectonic shifts in global supply chains spurred by the Trump administration’s trade war with China has already weakened many economies.

Why is section 301 important?

Under Section 301 of the Trade Act of 1974, the USTR has a range of responsibilities and authorities to investigate and take action to enforce United States national interests under trade agreements. and respond to certain foreign trade practices. Until recently, this facility was used by multiple jurisdictions to build cases and resolve disputes at the World Trade Organization (WTO).

Under former President Donald Trump, however, this authority was used to promote what his administration considered to be “free, fair and reciprocal” trade, in particular to close the trade gap or balance between the United States and the United States. foreign governments in cases where they have engaged in allegedly disadvantaged or discriminatory business practices against US companies. To a large extent, the Trump administration has aimed its Section 301 weapons on China, leading to an escalation of the tariff war that ultimately engulfed the last years of his tenure. Now, the Biden administration appears unwilling to reverse the Trump-era 301 investigations in their entirety; rather, it seems to seek a middle course of waving the stick of the USTR while leaving some room for further tax negotiations with the countries concerned.

Read also | Is India’s Digital Services Tax Discriminatory?

How will this affect India?

The 2021 finance bill introduced an amendment imposing a 2% digital services tax on the trade and services of non-resident e-commerce operators with a turnover of more than 2 crore. According to reports, early USTR estimates suggest this tax could raise around $ 55 million per year. Negotiations with Washington that could lead to the reduction of this tax would imply that part of this income would be lost to the public treasury, depending on the final rate agreed.

On the other hand, nearly $ 118 million of Indian exports to the United States would be subject to the tariff proposed by the USTR, affecting 26 categories of goods, including basmati rice, cigarette paper, cultured pearls, semi-precious stones, some gold and silver jewelry, and specific types of home furnishings.

India will need to carefully consider its options at this point. On the one hand, it would seek to avoid entering a matrix of retaliatory tax escalation with the United States, as this would hurt its growth prospects at a crucial time in its laborious recovery. However, it also won’t be able to simply abandon its explicit intention to tax global tech companies, which have typically benefited from low-tax transactions in many jurisdictions.

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